December 2016 Housing Commentary

Urs BuehlmannDepartment of Sustainable Biomaterials

Virginia TechBlacksburg, VA 540.231.9759

buehlmann@gmail.com

and

Al SchulerEconomist (retired)

Princeton, WV

Table of Contents

Slide 3: Housing Scorecard

Slide 4: New Housing Permits, Starts, & Completions

Slide 5: New and Existing House Sales

Slide 5: New Construction Data

Slide 6: Conclusions

Slide 7: European Construction Markets

Slide 8-55: Additional Comments&Data

Slide 56: Disclaimer

This report is a free monthly service of Virginia Tech. Past issues

can be found at: http://woodproducts.sbio.vt.edu/housing-report/

Source: U.S. Department of Commerce-Construction; 1National Association of Realtors® (NAR®)

M/M Y/Y

Housing Starts ∆ 11.3% ∆ 5.7%

Single-Family Starts 4.0% ∆ 3.9%

Building Permits 0.2% ∆ 0.7%

Housing Completions 7.9% ∆ 8.7%

New Single-Family House Sales 10.4% 0.4%

Existing House Sales1 2.8% ∆ 0.7%

Private Residential Construction Spending ∆ 0.5% ∆ 3.7%

Single-Family Construction Spending ∆ 0.5% ∆ 0.3%

M/M = month-over-month; Y/Y = year-over-year

December 2016

Housing Scorecard

∆

∆

∆

∆

∆

∆

December October Dec. 2015

Total permits* 1,210,000 1,212,000 1,201,000

Single-family permits 817,000 780,000 738,000

Multi-family 2-4 unit permits 38,000 37,000 35,000

Multi-family ≥ 5 unit permits 355,000 395,000 428,000

Total starts 1,226,000 1,102,000 1,160,000

Single-family starts 795,000 828,000 765,000

Multi-family 2-4 unit starts** 14,000 3,000 16,000

Multi-family ≥ 5 unit starts 417,000 271,000 378,000

Total completions 1,123,000 1,219,000 1,033,000

Single-family completions 761,000 768,000 708,000

Multi-family 2-4 unit completions** 7,000 11,000 9,000

Multi-family ≥ 5 unit completions 355,000 440,000 316,000

Housing Data

* All data are presented at a seasonally adjusted annual rate (SAAR).

** US DOC does not report 2-4 multi-family starts and completions directly, this is an estimation.

Source: U.S. Department of Commerce-Construction: www.census.gov/construction/nrc/pdf/newresconst.pdf; 01/19/17

Housing Data

b The US DOC does not report improvements directly, this is an estimation. All data is SAAR and is reported in nominal US$.

Sources:

NAR® www.realtor.org/topics/existing-home-sales; 01/27/17

U.S. Department of Commerce-Construction: www.census.gov/construction/nrs/pdf/newressales.pdf; 01/24/17

U.S. Department of Commerce-C30 Construction: www.census.gov/construction/c30/pdf/privsa.pdf; 02/01/17

a NAR®

December November Dec. 2015

New single-family sales 563,000 598,000 538,000

Median price $322,500 $309,200 $299,000

Existing salesa5,490,000 5,650,000 5,450,00

Median price $232,200 $223,200 $266,100

Private Residential Construction $466.9 billion $464.8 billion $450.1 billion

SF construction $250.4 billion $249.0 billion $249.7 billion

MF construction $63.7 billion $62.0 billion $57.1 billion

Improvement constructionb $152.8 billion $153.8 billion $143.4 billion

ConclusionsConclusionsHousing remains in slow mode, although it is improving. We have a new administration, and hopefully

they can get the economy moving again. GDP growth was 1.9% in 2016, and it is expected to remain

around 2% for some time.

November's housing data is mixed – total starts are up by 11.3% (m/m), single family homes starts are

down by 4.0% (m/m), permits are down by 0.2% (m/m), completions are down by 7.9% (m/m), and

existing home sales were down by 2.8% from the month before.

With meager economic growth (average growth since 2009 2.1%, slowest recovery since WWII) and

with 51% of all worker's in the U.S. making less than $30,000/year, it's hard to envision a scenario where

the U.S. housing market returns to "normal" anytime soon. Slowing economies in China, Brazil, among

others, and continuing problems in Europe's banking sector all add up to numerous negative macro-

factors endangering a robust housing recovery, in particular:

1) A constrained quantity of well-paying jobs being created;

2) a tepid economy;

3) declining real median annual household incomes;

4) strict home loan lending standards – though loosening with new programs

5) slow world economy; and

6) global uncertainty

M/M Y/YProduction in ConstructionA EU 28 ∆ 0.4%s ∆ 0.2%s

EU 19 ∆ 0.4%s 0.0%s

Germany ∆ 2.0% ∆ 1.7%

France 0.2% ∆ 0.7% UK ∆ 0.2%p ∆ 3.0%p

Spain 0.8%ps 4.5%p

Building permits (m2 floor) A EU 28 -.- -.-EU 19 0.3%(10) ∆ 21.8%s(10)

Germany ∆ 2.2% ∆ 16.2%France ∆ 0.7%s ∆ 8.5%e

UK -.- -.-Spain ∆ 15.3s(10) ∆ 107.2e(10)

Source: Eurostat (http://ec.europa.eu/eurostat/web/short-term-business-statistics/data/main-tables;

02/09/17) A see http://ec.europa.eu/eurostat/web/short-term-business-statistics/overview/sts-in-briefe estimate, s Eurostat estimate, p provisional, -.- no data available, (10) October data

M/M = month-over-month; Y/Y = year-over-year

November 2016

EU Housing Scorecard

∆ ∆

∆

∆

Housing comments – December 2017

- December starts were up 11% to 1.226 ( SAAR) - SF at 795,000

(SAAR) – down 4% - MF was up 54% ( yes, 54%) – that was the driver!

MF is typically quite volatile. YOY, total starts are up 6%

- Adjusting for population growth, (starts per household), SF

construction remains near recession levels of early 1980’s. So, SF

housing basically remains in recession mode!

- Home ownership rate down to 63.5% in QTR3 2016 – lowest ownership

rate in 50 years! Financing problems; changing preferences (to

renting); and rising home prices - problem for 1st time buyers

- Resale market fell 0.7% - 5,490,000 (annual rate) – low inventory

(3.6 months) driving prices higher

- New home sales were down 10.4% to 536,000 SAAR, but up 12% YOY

- Job creation took a breather in December - +156,000 - unemployment

up a tick to 4.7% - – and real wages increased 2.9% in 2016!

- GDP growth was 1.9% in the 4th Qtr – same for all of 2016. This is the

slowest expansion since WWII, and until we improve productivity,

sustainable growth will remain 2% at best. If the new administration

addresses problems re: over regulation; taxes; infrastructure;

education(K-12); investment; debt, we could grow substantially

faster.

(http://www.wsj.com/articles/u-s-home-construction-lags-behind-broad-economic-rebound-1481914669)

“Adjusting for population growth, single-family construction is barely back to the prior

troughs of recessions in 1981 and 1991, according to research from mortgage giant

Fannie Mae”( Chris Kirkham, WSJ). Weak demand from young people remains big

problem as job prospects, credit problems, and student debt forced many to renting.

Same story showing new home sales versus population – despite

lowest mortgage rates in history, today’s new home sales per million are no

better than back in 1980 when mortgage rates were almost 20%. Tells me

that low mortgage rates are not the answer – people need good jobs and a

belief in their future – today, both are in jeopardy!

Economy

Want to fix the U.S. Economy? Start with the broken

political system as outlined in a new report from Porter

et al. (we started this discussion this past November)

Political dysfunction has become the biggest economic

stumbling block for the U.S., according to the Harvard

report.

Here is the hyperlink to the Porter study

(http://www.hbs.edu/competitiveness/Documents/problems-unsolved-and-a-nation-divided.pdf)

Interesting report from experts on competitiveness.

Slow reading, but lots of good analysis, charts, and

recommendations from some of America’s leading

thinkers on competitiveness.

Here are suggestions from the Porter study on how to

fix America’s economy – however, to accomplish this, we need

a functioning government which we don’t have.

Hopefully, the new administration will begin the process of fixing

The problems!

Huge problem facing this country is public debt – that’s the debt that has to be

repaid. Total debt today ~ $20 trillion, of which $14 trillion is “public debt”.

The $6 trillion (“borrowed”) by the Treasury from the Social Security, Medicare,

and highway trust funds is gone/spent. Here is link to real time debt clock

(http://www.usdebtclock.org/) – a scary picture! Public debt now equals 75%

of GDP – we’re getting very close point of no return – where principal plus

interest payments exceed our capacity to pay, and lenders refuse to lend.

Going into debt is OK if you’re investing for the future - but, we’re not!

For decades, we, as a nation, have been living a fantasy life.

Entitlement spending is now approaching 50% of the federal budget

while investment spending (critical to maintain our competitiveness) –

has been declining for the past 60 years (Porter et al.).

Business isn’t investing either --- has been trending

lower for the past several years. That’s why GDP growth remains weak.

That means income growth will remain weak and housing will continue to

underperform, and creation of good paying jobs will remain an elusive goal.

(http://www.wsj.com/articles/make-america-grow-again-1469831784)

Capital spending has been trending lower for past 4 years

Why? Companies not confident of future – uncertainty re:

Tax code, regulations; Washington grid lock!

( http://www.wsj.com/articles/u-s-durable-goods-orders-fell-2-2-in-may-1466771610 )

Another structural problem – new business formations are

down significantly, this is why job creation is slow (Porter et al.

WSJ (http://www.wsj.com/articles/sputtering-startups-weigh-on-u-s-economic-growth-1477235874)

Slowdown in entrepreneurship is one reason economy

remains mired in slow growth mode!

What happens when innovation is missing!

Dismal productivity growth - - worst performance for US economy

since the 1980’s when we experienced Back to back recessions.

(PS – I understand that productivity measurement is a problem as new products/services quality is

difficult To measure so maybe we are underestimating real productivity?)

Source: WSJ (http://www.wsj.com/articles/u-s-productivity-dropped-at-0-5-pace-in-the-second-quarter-1470746092)

( http://finance.yahoo.com/news/us-competitiveness-project-harvard-business-school-hbs-michael-porter-030021739.html )

Waning productivity is major cause of our economic problems. Weakening trend

over past 60 years needs to change if wages/standard of living are to improve.

According to recent study by Porter et al., competitiveness is key. Solution

is infrastructure reform, tax reform, and immigration reform. Political paralysis

keeps us from implementing the right solutions according to Porter et al.

Falling Basic R&D - - funding basic science is declining – big

problem that needs fixing

Federal government funds basic research while industries fund applied research –

basic research is critical to development of new technology and innovation in

science and engineering - critical to economic and job growth, and productivity.

(http://www.wsj.com/articles/the-dividends-of-funding-basic-science-1480982516?mod=rss_opinion_main)

U.S. 4th Qtr 2016 economic growth 1.9% - same rate for entire 2016

the slowest expansion since WWII.

(1) Slowing world economy (weaker China, European, and South American growth)

(2) Stronger dollar will reduce exports and increase imports – negative

impact on manufacturing jobs which is key to income growth in USA

(3) Political stalemate/weak leadership, terrorism, currency wars, growing national debt, ...

(4) Weak income growth and continuing high “real unemployment”

Source: BEA (http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm)

(http://finance.yahoo.com/news/us-competitiveness-project-harvard-business-school-hbs-michael-porter-030021739.html)

Weak growth means weak income growth and weak

housing numbers in the future unless we address

our competitiveness issues.

Here are a few slides on labor market conditions – problems

persist, but there are solutions

(http://www.wsj.com/articles/the-idle-army-americas-unworking-men-1472769641)

Not a good trend for the economy – employment to population ratio keeps

decreasing – too much welfare, plus many people don’t have the required

job skills (half the population on some form of welfare – food stamps,

Medicaid, long term disability, housing allowances, etc.)

Here’s where the jobs are – but, again, lack of skills

means many of these positions go unfilled!

Education will help keep you out of the unemployment line

Additional housing comments

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Starts are inching forward – But, low interest rates can’t fix

housing!This is basically a two tiered market – healthy upper

end versus weak entry level housing - - not sustainable.

Source: Census (http://www.census.gov/const/www/newresconstindex.html)

Single family starts, Thousand units, SAAR

December - - 795,000, up 4%

versus December 2015

0

200

400

600

800

1000

1200

1400

1600

New Single Family Home sales are the key statistic to watch for wood

products demand – sales drive housing starts – this drives demand for

wood products!

Thousands, SAAR

Source: Census (http://www.census.gov/const/www/newressalesindex.html)

December 2016 536,000

Note: Sales represent only houses built for sale

or “spec homes” – does not include contractor

built or homes built by the owner. Historically,

“spec homes” represent about 70% of the market

(https://www.census.gov/construction/nrc/salesvsstarts.html)

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Single family (incl. condos), Monthly, Thousand units, SAAR

Source: NAR (http://www.realtor.org/news-releases/2015/06/existing-home-sales-bounce-back-strongly-in-may-as-first-time-buyers-return)

December 2016 - 5,490

Resale market continues to improve - however, tight supply (which drives

prices), currently at 3.6 months, remains a problem. Healthy market is about

6 months supply. Median prices are up 4%, annual basis - 56th

consecutive

monthly increase.

59

60

61

62

63

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68

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70

1990

1991

1992

1993

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1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Home Ownership(%)

Source: Census (https://www.census.gov/housing/hvs/data/q413ind.html)

Household formations and shift to renting - Falling homeownership

rate for millenial’s - use to be 43% - now it is 33% - young people are renting

Long term trend

Recent study shows that people with college degree take 5 years to save

enough for down payment for starter home (with student debt – 10 years),

no college – 16 years (http://www.wsj.com/articles/homeownership-elusive-for-young-adults-without-college-degrees-1463909402)

Homeownership lowest in 50 years

3rd qtr - - 63.5%

Rental demand versus single family housing

Rental demand will continue to increase for years – a recent study by the

Urban Institute suggests it may continue for another decade or two( http://www.wsj.com/articles/new-housing-crisis-looms-as-fewer-renters-can-afford-to-own-1433698639 )

Why - - demographics; growing minority population; student debt; weak

income growth; …. E.g., minorities (nonwhite) will make up 75% of net household growth

over the next 10 years, and 85% during 2020- 2030. They are

less likely to own homes (lower incomes is main reason) so home ownership

continues to fall toward 60% by 2030. During this time, rental demand will

increase dramatically. Although this is just one study, it provides food for thought.

One potential question with the study, however, is other studies show that

although immigrants, for example, rent initially, but, over time they purchase

homes at a rate equal to or higher than native born Americans. Why – people

come to the U.S. to Improve quality of life, and for most, this means

homeownership. This suggests that the U.S. has to find solutions to

immigration issues like “illegal immigrants,” while encouraging legal

immigration. This country was founded by immigrants seeking a better life, and they are

key to our future. And, incomes for all Minorities has to improve if home ownership is to

return to “good old days.” (http://www.engineeredwood.org/Data/sites/3/documents/EngWoodJournal/EWJ_Spring2010.pdf)

Anyway, this has potential implications for home ownership; single family

construction; and demand for wood products – lots of variables and scenarios.

Source: Census : (http://www.census.gov/housing/hvs/files/currenthvspress.pdf)

Increasing rents are slowing housing starts - -

more difficult for renters to save for down payment for house purchase

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2010 2011 2012 2013 2014 2015 2016

Multi family share of housing starts – upward trend expected to continue for

Some time. Also, since the housing crash in 2008, single family rentals

have now reached 15% of overall housing stock, up from 9% in 2005

(http://blogs.wsj.com/economics/2015/07/20/signs-of-overheating-in-the-single-family-rental-market/)

Multi family starts (%)

Source: Census

Low new home inventory drives prices higher

and out of reach to most 1st

time buyers

But, builders can’t find enough carpenters, masons, electricians, etc.

So construction costs keep escalating, exacerbating the inventory

problem – also, land shortages in parts of the country drive costs higher!

(https://research.stlouisfed.org/fred2/series/MSACSR)

More News on the labor front

-800

-600

-400

-200

0

200

400

600

2008

2009

2010

2011

2012

2013

2014

2015

2016

Net change in non farm payrolls – monthly, thousands

Employment situation - our biggest problem – stuck below 200,000,

and many of these jobs are part time with little or no benefits – not conducive

to driving housing demand higher - need to encourage innovation and

investment in future

Source: U.S. BLS (www.bls.gov)

December +156,000

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016

December 2016 Official unemployment rate – 4.7%

equates to 7.4 million people

Unemployment rate keeps coming down – but, nearly 7 million remain

“underemployed” – working part time, but want full time jobs

Source - - BLS: http://www.bls.gov/news.release/pdf/empsit.pdf; http://data.bls.gov/cgi-bin/surveymost?ln

The real unemployment rate - - 9.2%

(15 million people)

Labor force participation rate is shrinking – demographics is one reason.

Another reason – bloated welfare system – 130 million people on some form of

welfare (food stamps, long term disability, housing allowances, Medicaid, …) - -

we’ll see skilled labor shortages increase over the next decade - we’re already

seeing construction related shortages with brick layers, masons, electricians,

plumbers, etc.

Excellent article (http://finance.yahoo.com/news/should-i-go-to-a-trade-school-162413337.html#)

Source: BLS

% of civilian adult population , that are working

60.0%

61.0%

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

December 2016 – 62.7% participation rate

Interesting article shows that in most countries

labor force participation rate is increasing(http://blogs.wsj.com/economics/2015/06/26/the-u-s-stands-out-on-labor-force-participation-rates/)

Key reason why

unemployment rate keeps falling

(https://fred.stlouisfed.org/series/MEHOINUSA672N)

But, incomes are starting to improve – good news!

Some conclusions – housing continues to improve albeit very slowly

and this will not change soon for the reasons listed below:

(1) Economy is improving (slowly) -- 2016 growth was 1.9%

and 2017 is expected to be about the same.

(2) Housing market still not healthy - 1st time buyers (33% today) are below trend

(45%) - household formations are improving, but more people will continue

to rent

(3) Productivity growth is a major problem for U.S. economy – real GDP driven

by population (number of workers) and real GDP/worker (productivity),

During past 7 years, productivity has grown 1.7% annually whereas the

average over previous 17 years was 2.4%.

(4) “QE” not working – bulk of “printed money” hoarded by the banks to shore up

capital positions – not being loaned out to the economy - GDP languishes -

we need a new and more effective approach to our competitiveness problems!

(5) The fed increased rates in December, finally. Low rates are not

the solution to our weak economy. Innovation, investment, tax reform,

is the solution, but that will be challenging with $20 trillion (and counting)

federal debt and 41% of the population on some form of welfare.

Many business leaders have lost confidence in where the country

is headed so they are not investing.

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